632020 Sources, Rules, and Creation of an Innovation Guide S.docx

6/3/2020 Sources, Rules, and Creation of an Innovation Guide
Scoring Guide
https://courserooma.capella.edu/bbcswebdav/institution/BMGT/
BMGT8134/200100/Scoring_Guides/u08a1_scoring_guide.html
1/1
Sources, Rules, and Creation of an Innovation Guide Scoring
Guide
Due Date: End of Unit 8
Percentage of Course Grade: 35%.
CRITERIA NON-PERFORMANCE BASIC PROFICIENT
DISTINGUISHED
Analyze how effectively a
publicly traded for-profit
organization applies
theories, models, and
guidelines of disruptive
innovation.
25%
Fails to mention how
effectively a publicly
traded for-profit
guidelines for disruptive
innovation.

Outlines how effectively a
innovation.
Analyzes how effectively
a publicly traded for-profit
innovation.
Analyzes how effectively a publicly traded
for-profit organization applies theories,
models, and guidelines for disruptive
innovation. Synthesizes the application for
gaps in an exceptionally accurate and
impressive manner.
Develop approaches for
leading strategic foresight
and suggest alternative
models of disruptive and
value innovation for a
organization.
25%
Fails to list approaches
for leading strategic
foresight and suggesting
alternative models of
disruptive and value
innovation for a publicly

traded for-profit
organization.
Outlines approaches for
and suggests alternative
organization.
Develops approaches for
and suggests alternative
organization.
Develops approaches for leading strategic
foresight and suggests alternative models of
disruptive and value innovation for a publicly
traded for-profit organization.
Recommendations are supported with
substantial literature and superiority in
critical thinking skills is evident.
Create an innovation
“cookbook” with best
practice guidelines.
25%
Fails to create an
innovation “cookbook”
with best practice
guidelines.

Makes a limited attempt
at creating an innovation
“cookbook” with limited
practice guidelines and
limited or no supporting
theories.
Creates an innovation
“cookbook” with best
practice guidelines.
Creates a robust innovation “cookbook” with
exceptional clarity of best practice
guidelines. Presents and carefully integrates
supporting theories and highlighting
similarities and differences.
Communicate in a manner
expected of doctoral-level
composition, including full
APA compliance and
demonstration of critical
thinking skills.
25%
Fails to communicate in a
manner expected of
doctoral-level
composition, including full
APA compliance and
thinking skills.
Communicates at a basic
level in a manner

expected of doctoral-level
composition and includes
partial APA compliance
and demonstration of
critical thinking skills.
Communicates in a
manner expected of
doctoral-level
composition including full
APA compliance and
thinking skills.
Communicates in a manner expected of
doctoral-level composition including full APA
compliance and demonstration of critical
thinking skills. Communication is
exceptionally polished and impressive at a
superior level.
The 5 Myths of Innovation
W I N T E R 2 0 1 1 V O L . 5 2 N O . 2
R E P R I N T N U M B E R 5 2 2 1 0
By Julian Birkinshaw, Cyril Bouquet and J.-L. Barsoux
Please note that gray areas reflect artwork that has been
intentionally removed. The substantive content of the ar-
ticle appears as originally published.

Myth # 2: Build It and
They Will Come …
The U.K.-based soc-
cer club Ebbsfleet
United was bought
and run in 2007 by a
Web community of
30,000. But by 2010 its
paying membership
had dwindled
to just 800.
SLOANREVIEW.MIT.EDU WINTER 2011 MIT SLOAN
MANAGEMENT REVIEW 43
I N N O VA T I O N
HISTORICALLY, MOST MANAGERS equated innovation
primarily with the development
of new products and new technologies. But increasingly,
innovation is seen as applying to the devel-
opment of new service offerings, business models, pricing plans
and routes to market, as well as new
management practices. There is now a greater recognition that
novel ideas can transform any part of
the value chain — and that products and services represent just
the tip of the innovation iceberg.1
This shift of focus has implications for who “owns” innovation.
It used to be the preserve of a

select band of employees — be they designers, engineers or
scientists — whose responsibility it was
to generate and pursue new ideas, often in a separate location.
But increasingly, innovation has
come to be seen as the responsibility of the entire organization.
For many large companies, in fact,
the new imperative is to view innovation as an “all the time,
everywhere” capability that harnesses
the skills and imagination of employees at all levels.2
Making innovation everyone’s job is intuitively appealing but
very hard to achieve. Many compa-
nies have put in place suggestions, schemes, ideation programs,
venturing units and online forums.
(See “A Glossary of Established Drivers of Innovation,” p. 45.)
However, the success rate of such ap-
The 5 Myths of Innovation
Nowadays, goes the theory, innovation is supposed to be done
constantly, by everyone
in the company, improving everything the company is about —
and new Web-based
tools are here to help it happen. Is the theory right? Or do the
experiences of companies
reveal something different?
BY JULIAN BIRKINSHAW, CYRIL BOUQUET AND J.-L.
BARSOUX
THE LEADING
QUESTION

What conven-
tional wisdom
about innova-
tion no longer
applies?
FINDINGS
Online forums are
not a panacea for
innovation.
Innovation shouldn’t
always be “open.”
Internal and external
experts should be
used for very differ-
ent problems.
Innovation must
be bottom-up and
top-down — in an
approach that’s
balanced.
www.sloanreview.mit.edu
44 MIT SLOAN MANAGEMENT REVIEW WINTER 2011
SLOANREVIEW.MIT.EDU
I N N O VA T I O N
proaches is mixed. Employees face capacity, time and
motivation issues around their participation. There

is often a lack of follow-through in well-intentioned
schemes. And there is typically some level of discon-
nect between the priorities of those at the top and
the efforts of those lower down in the organization.
Moreover, Web-based tools for capturing and
developing ideas have not yet delivered on their
promise: A recent McKinsey survey revealed that
the number of respondents who are satisfied over-
all w ith the Web 2.0 tools (21%) is slig htly
outweighed by the number who voice clear dissat-
isfaction (22%).3
To understand these challenges, and to identify
the innovation practices that work, we spent three
years studying the process of innovation in 13
global companies. (See “About the Research.”) All
of these companies embarked on often-lengthy
journeys aimed at making themselves more consis-
tently and sustainably innovative. All sought to

engage their employees in the process, and all made
use of online tools to facilitate and improve the
quality and quantity of ideas. Our research allowed
us to confirm many of the standard arguments for
how to encourage innovation in large organiza-
tions, but we also uncovered some surprising
findings. (See “Questions That Work — and Don’t
— in Online Innovation Forums, ” p. 47 for a sum-
mary.) In this article we focus on the key insights
that emerged from our research, organized around
five persistent “myths” that continue to haunt the
innovation efforts of many companies.
Myth # 1. The Eureka Moment
For many people, it is still the sudden flash of insight
— think Archimedes in his bath or Newton below
the apple tree — that defines the process of innova-
tion. According to this view, companies need to hire
a bunch of insightful and contrarian thinkers, and
provide them with a fertile environment, and lots of

time and space, to come up with bright ideas.
Alas, the truth is far more prosaic. It is often said
that innovation is 5% inspiration and 95% perspi-
ration, and our research bears this out. If you think
of innovation as a chain of linked activities — from
generating new ideas through to commercializing
them successfully — it is the latter stages of the pro-
cess where ideas are being worked up and developed
in detail that are the most time consuming.4 More-
over, it is also the latter stages where problems occur.
We recently conducted a survey in 123 companies,
asking managers to evaluate how effective they were
at each stage in the innovation value chain. On aver-
age, they indicated that they were relatively good at
generating new ideas (either from inside or outside
the boundaries of the company), but their perfor-
mance dropped for every successive stage of the
chain. (See “Which Parts of the Innovation Value

Chain Are Companies Good At?” p. 48) We are not
suggesting that generating ideas is unimportant. But
that is not where most companies struggle. Most
companies are sufficiently good at generating ideas;
the “bottleneck” in the innovation process actually
occurs a lot further down the pipeline.
The eureka myth helps explains why so many
companies are drawn to big brainstorming events,
with names such as ideation workshops and inno-
vation jams.5 In the course of our research we saw
many different types of brainstorming events, and
indeed we helped several of the sample companies
to put them on. Such events are always valuable:
They help to focus the efforts of a large number of
people, they generate excitement and interest and
they generate some useful ideas.
But even with all these benefits, it’s not clear that
ideation workshops are the right way to build com-

panywide innovation capability. As an analogy,
think of the role that big musical festivals like Live
Aid play in the alleviation of poverty. These big
events are terrific for raising awareness and money
on a one-time basis, but the process of poverty al-
leviation takes years of hard effort on the part of aid
organizations, and the outcomes are achieved long
after the memory of the big event has faded. The
involvement of the general public in aid work usu-
ally ends with the check we write to Live Aid; but
for the aid organization receiving the money, that is
where the real work starts.
Our research showed that most companies fail to
think through the consequences of putting on ide-
ation workshops. The first problem is that they
underestimate the amount of work that is needed after
the workshop is completed. IBM’s 2006 online Inno-
vation Jam, described in more detail below, required a

team of 60 researchers to sort through the 30,000 posts
received over a 72-hour period. UBS Investment
ABOUT THE
RESEARCH
Our research was con-
ducted over a three-year
period in cooperation with
a group of leading compa-
nies. The participants came
from various sectors: con-
sumer products (Mars,
Sara Lee, Best Buy, Whirl-
pool), pharmaceuticals
(Roche Diagnostics, GSK),
broadcasting (BBC), energy
(BP), information and com-
munication technology (BT,
IBM), business information
(ThomsonReuters) — as
well as two banks that
were at the center of the
recent financial crisis (UBS
and RBS). We could have
excluded them from the
study, but they faced dis-
tinctive challenges that
significantly enriched the
study. We interviewed a
total of 54 people, some of
them several times, in
these companies, and we
wrote up detailed case
studies about six of the

companies (Mars, Roche,
GSK, IBM, BT and UBS).
Apart from tracking and
reporting on their innova-
tion efforts, some of the
participant companies
also came together for a
roundtable conference at
London Business School
in December 2008. This
provided a fascinating
window on the challenges
of implementing an inno-
vation strategy in large
organizations, and it al-
lowed us to test out some
of our provisional ideas.
WINTER 2011 MIT SLOAN MANAGEMENT REVIEW
45SLOANREVIEW.MIT.EDU
Bank’s Idea Exchange, while conducted on a smaller
scale, also involved a great deal of post-event work. As
one UBS manager observed: “Preliminary sorting,
then scoring and giving feedback on such a large
number of ideas took a huge amount of time and ef-
fort by category owners and subject matter experts.

The ideas coming through were good, but if we are to
do it again we need a repeatable, dashboard-style re-
porting system for quantifying results and keeping
the momentum going.”
The second, and more insidious, problem with
ideation workshops is that they can actually be dis-
empowering if the organization lacks the capacity to
act on the ideas generated. We heard quite a few
grumbles during the research from individuals who
had put forward their bright ideas through a work-
shop or online forum, but received no response — not
even an acknowledgment. If the “funnel” is con-
stricted further down, at the point where ideas get
assessed and developed, stuffing new ideas at the top
is simply going to exacerbate the problem.
So what should you do? First, be very clear what
problem you are trying to solve, and put on an ide-
ation workshop only if you believe that it is a lack of

ideas that is holding you back. Second, if you believe
that an ideation workshop is the right approach, be
prepared to invest a lot of time and effort into the
follow-up work. It is sobering to note that successful
innovation programs typically take many years to
bear fruit: Procter & Gamble’s Connect + Develop
initiative was piloted and developed over a 10-year
period, while Royal Dutch Shell’s Gamechanger ini-
tiative took more than five years to yield benefits. Alas,
many companies lack the continuity in leadership
needed to make this type of long-term commitment.
Takeaway: Most innovation efforts fail not because
of a lack of bright ideas, but because of a lack of
careful and thoughtful follow-up. Smart companies
know where the weakest links in their entire inno-
vation value chain are, and they invest time in
correcting those weaknesses rather than further re-
inforcing their strengths.

Myth # 2. Build It and
They Will Come
The emergence of second-generation Internet
technologies (“Web 2.0”) has had a dramatic im-
pact on how we share, aggregate and interpret
information. The proliferation and growth of on-
line communities such as Facebook and LinkedIn
seduce us into assuming that these new means of
social interaction will also transform the way we
get things done at work.
But for every online community that succeeds,
many others fail. Some make a good start but then
enthusiasm wanes. For example, MyFootballClub is
a U.K.-based website whose 30,000 members bought
a soccer club, Ebbsfleet United, in 2007. However, by
2010 its paying membership had dwindled to just
800 people, leading to severe financial difficulties
for Ebbsfleet United. Other online community ini-
tiatives fail to live up to their founders’ hopes. For

example, during the transition period before he
came into office, President Obama endorsed the
idea of an online “Citizen’s Briefing Book” for peo-
ple to submit ideas to him. Some 44,000 proposals
and 1.4 million votes were received, but as the Inter-
national Herald Tribune reported, “the results were
A GLOSSARY OF ESTABLISHED
DRIVERS OF INNOVATION
There is a growing body of work on the leading-edge practices
in innovation
management. Consultants and scholars concur on a number of
proven condi-
tions that contribute to sustained innovation.i These include:
Shared understanding: Sustained innovation is a collective
endeavor built on
a shared sense of what the company is becoming — and what it
is not becom-
ing. It is also about creating a culture to support innovation —
for example, by
destigmatizing failure and celebrating successes.
Alignment: Besides promoting values that support innovation,
organizations
also have to address structural impediments (such as silos) and
realign contra-
dictory systems and processes. As the group head of innovation
in one
company told us, “We needed to create an environment where it

was ‘safe to
experiment’; where it was possible to ‘pilot’ and ‘test’ ideas
before they were
subjected to our stringent performance metrics.”
Tools: Employees need the training, concepts and techniques to
innovate. In the
memorable words of a decision support manager at 3M, “It
doesn’t work to urge
people to think outside the box without giving them the tools to
climb out.”ii
Diversity: Innovation requires a degree of friction. Bringing in
outsiders — new
hires, experts, suppliers or customers — and mixing people
across business
units, functions and geographies helps spark new ideas.
Interaction: Organizations need to establish forums, platforms
and events to
help employees build networks and to provide opportunities for
exchange and
serendipity to happen.
Slack: Employees need some access to slack resources, not least
in terms of
timeout from their regular activities to experiment and develop
new ideas. This
also requires focus — both personal and organizational — on
eliminating non-
value-adding activities.

SLOANREVIEW.MIT.EDU
I N N O VA T I O N
quietly published, but they were embarrassing.”6
The most popular ideas — in the middle of an eco-
nomic meltdown — included legalizing marijuana
and online poker, and revoking the Church of Sci-
entology’s tax-exempt status.
How does this affect the process of innovation?
Unsurprisingly, all the companies we studied had
figured out that the tools of Web 2.0 could poten-
tially be very valuable in helping large numbers of
people get involved in an innovation process. Most
had built some sort of online forum in which em-
ployees could post their ideas, comment and build
on the ideas of others and evaluate proposals. For
example, IBM used space on its corporate Intranet
to launch a 72-hour Innovation Jam in 2006, the
purpose being to get IBM employees, clients and

partners involved in an online debate about new
business opportunities. The Innovation Jam at-
tracted 57,000 visitors and 30,000 posts. A rather
different example is Royal Bank of Scotland’s devel-
opment of a virtual innovation center in Second
Life, which allowed the bank to prototype potential
new banking environments and get direct and rapid
feedback from employees around the world.
In these and other cases, the implicit logic was:
Build it, and they will come. Both IBM and RBS
had considerable success in attracting interest, but
the overall story was much more mixed. Some on-
line for ums really helped to galvanize their
company’s innovation efforts. Others ended up
underused and unloved.
What are the biggest problems with developing
online innovation forums? The first is that the
forum doesn’t take off. It’s usually quite straight-

forward to get people to check out a new site once
or twice, but they need a reason to keep coming
back. As MyFootballClub found, the risk is that the
novelty of an innovation forum will wear out pretty
quickly and participation will dwindle. A manager
at Roche Diagnostics observed: “Our hope that our
internal technology-oriented people would gravi-
tate to using this type of tool was completely
unfounded. We really had to push people (via an
electronic marketing campaign) to involve them in
suggesting solutions to the six problems we identi-
fied.” Equally, managers at Mars and UBS found
their innovation efforts stalling after promising
starts. One said: “We probably underestimated the
communications needed. We were good up-front,
but learned that continuous communications is
vital. We had to counter some skepticism, to create
the belief that something would happen.”

The second risk is that, like Obama’s Citizen’s
Briefing Book, the ideas that get posted are off-
topic, half-baked or irrelevant. All the managers we
spoke to acknowledged that they had to work hard
to “separate the wheat from the chaff.” Many of the
ideas put forward were parochial or ill-informed,
and few people took the trouble to build on the
ideas of others. The notion that the good ideas
would be picked up by others and rise to the top
rarely worked out.
So what should you do to avoid these problems?
The most important point is to understand the types
of interaction that occur in online forums, so that
you use them in the right way. If you are looking for
creative, never-heard-before ideas, and if you want
people to take responsibility for building on one an-
other’s ideas, then a face-to-face workshop is your
best bet. But if you are looking for a specific answer

to a question, or if you want to generate a wide vari-
ety of views about some existing ideas, then an online
forum can be highly efficient. (See “Questions That
Work — and Don’t — in Online Innovation Fo-
rums” for examples.)
Takeaway: Online forums are not a panacea for dis-
tributed innovation. Online forums are good for
capturing and filtering large numbers of existing
ideas; in-person forums are good for generating and
building on new ideas. Smart companies are selec-
tive in their use of online forums for innovation.
Myth # 3. Open Innovation
Is the Future
Any discussion of innovation in large companies
sooner or later turns to the issue of “open” innova-
tion — the idea that companies should look for
ways of tapping into and harnessing the ideas that
lie beyond their formal boundaries. Many compa-
nies are now embracing open innovation in its

many guises. For example, the Danish toymaker
LEGO has been leveraging customer ideas as a
source of innovation for years, and some new
products are even labeled “created by LEGO fans.”7
And one of P&G’s first experiments with online
advertising invited people to make spoof movies
of P&G’s “Talking Stain” TV ad and post them on
YouTube — resulting in over 200 submissions,
some of which proved good enough to air on TV.8
Our research confirmed that most large com-
panies believe a more open approach to innovation
is necessary, but it also underlined that there is no
free lunch on offer. The benefits of open innova-
tion, in terms of providing a company with access
to a vastly greater pool of ideas, are obvious. But

the costs are also considerable, including practical
challenges in resolving intellectual property own-
ership issues, lack of trust on both sides of the fence
and the operational costs involved in building an
open innovation capability. Open innovation is
not the future, but it is certainly part of the future,
and the smart approach is to use the tools of open
innovation selectively.
Roche Diagnostics was a company that got a lot
of value out of open innovation. In 2009 it put in
place an experimental initiative to overcome spe-
cific technological problems that were preventing
certain R&D programs from moving forward. The
company identified six technology challenges that
needed solving, and it opened the challenges up to
the internal R&D community and to the external
technology community through Innocentive and
UTEK (now Innovaro), two well-known technol-

ogy marketplaces. The manager in charge of the
initiative described the outcome thus:
Internally, the number of responses to these six
challenges was very low. But one very thoughtful
response to one of the challenges was brilliant,
and paid for the entire experiment. Externally,
we used Innocentive and UTEK, and both had a
far higher response rate than our internal exper-
iment — more than 10 times the volume of
responses, in fact. We offered a $1,500 reward, so
this could have been an influencing factor. We
received one novel solution, which really made
the entire experiment worthwhile, but more
than that was our very positive experience of in-
volving external collaborators.
Roche’s experience was the closest thing we saw to
a proper experiment that compared the merits of tap-
ping into internal and external communities — and

it really highlighted the value of tapping into the ex-
ternal group. But note that the potential respondents
were being asked a very narrow, technology-specific
question. Clearly, the external community would
have been far less useful for tackling company-spe-
cific or situation-specific problems.
What are the downsides or limitations of open
innovation? One set of concerns relates to how you
handle intellectual property issues. At the time of
writing, Roche Diagnostics was still working
through the details of the licensing agreement with
the person who solved its technological problem,
and the transaction and licensing costs were far
from trivial. A related issue is that without the
strong IP protection that a market-maker like In-
nocentive provides, external parties are careful with
what they will share. IBM discovered this in its In-
novation Jam. As one manager recalled, “This Jam

was established as an open forum, so anyone can
take these ideas and use them. So we felt we were
taking a few risks doing this, and perhaps it meant
that our clients were quieter in the discussions than
QUESTIONS THAT WORK — AND DON’T —
IN ONLINE INNOVATION FORUMS
WHAT WORKS
■ Option-based questions where you want to know the
distribution of current
views, for example:
• Which of the following sources of information do you use
most frequently
in the workplace? (print media, digital media, experts,
colleagues)
• How would you rate our speed of customer responsiveness on
a
one-10 scale?
■ Narrow, often technical, questions for which there is one (or
more) factually
correct answer, for example:
• Can anyone tell me what to do when I am faced with this error
code?
Syntax Loop unspecified Ref 56663.
WHAT DOESN’T
■ Questions that ask for a big conceptual leap forward without
providing any

raw material for people to latch onto, for example:
• We are looking for radical new approaches to customer service
in our retail
bank — any ideas?
Advice: Provide some unusual stimuli to encourage people to
think differently, for
example: How could we make the retail bank more like your
favorite restaurant?
■ Questions that ask people to build one another’s ideas in a
constructive
manner, for example:
• Let’s start a discussion thread about new approaches to
working more
closely with our customers.
Advice: Use a mix of online and in-person brainstorming
sessions; or actively
manage the thread to create some coherence.
SLOANREVIEW.MIT.EDU
I N N O VA T I O N
we would have liked. But it was important to make
this open in every sense of the word.”
A second set of concerns was around how the

companies we studied actually used the insights
provided by external sources. One European tele-
com company had a “scouting” unit in Silicon
Valley to keep an eye on exciting new startups and
emerging technologies, but the scouting team dis-
covered that the only technologies the folks back in
Europe were interested in were those that would
help them accelerate their current development
road map. The really radical ideas, the ones that the
scouting unit was putatively looking for, were sim-
ply too dissonant for the European development
teams to get their heads around.
A final concern is simply the time it takes to do
open innovation properly. Companies such as
Procter & Gamble, Intel and LEGO have put an
enormous amount of investment into building
their own external networks, and they are begin-
ning to see a return, but you shouldn’t underestimate

the time and effort involved.
Takeaway: External innovation forums have access
to a broad range of expertise that makes them effec-
tive for solving narrow technological problems;
internal innovation forums have less breadth but
more understanding of context. Smart companies
use their external and internal experts for very dif-
ferent types of problems.
Myth # 4. Pay Is Paramount
A dominant concern when organizations set out to
grow their innovation capabilities is how to structure
rewards for ideas. A common refrain is that innovation
involves discretionary effort on top of existing respon-
sibilities, so we have to offer incentives so people to put
in that extra effort. The example of the venture capital
industry was mentioned as a setting in which people
coming up with ideas, and those backing them, all
have the opportunity to become rich.

But both academic theory and our discussions
with chief innovation officers indicate that this is a
red herring.
Let’s briefly look at the theory. People are moti-
vated by many factors, but extrinsic rewards such as
money are usually secondary, hygiene-type factors.
The more powerful motivators are typically “social”
factors, such as the recognition and status that is
conferred on those who do well, and “personal” fac-
tors, such as the intrinsic pleasure that some work
affords. More specifically, there is evidence from
psychology research that individuals view the offer
of reward for an enjoyable task as an attempt to
control their behavior, which hence undermines
their intrinsic task interest and creative perfor-
mance.9 Parallel research in behavioral economics
suggests that intrinsic motivation is especially likely
to suffer when the incentives are large.10

All of which suggests that you don’t need mone-
t a r y re w a rd s f o r i n n ov a t i o n . In n ov a t i o n i s
intrinsically enjoyable, and it’s easy to recognize
and confer status on those who put their discre-
tionary effort into it. Our research interviews
provided plentiful evidence that this is the case.
Take the experience of UBS. With considerable
upheaval at senior levels of the bank, the innovation
movement was very much a grassroots effort —
built around “UBS Idea Exchange,” an online tool.
The executive in charge of that effort commented:
“We found that employees having an opportunity
to put forward their ideas brought huge personal
rewards. We learned very clearly (through our ex-
periments) that financial rewards would not have
made any difference. People reported that recogni-
tion of their ideas was a reward in itself. They
wanted to be engaged and to participate. We there-

fore involved people in presenting their ideas to
senior management.”
WHICH PARTS OF THE INNOVATION VALUE
CHAIN ARE COMPANIES GOOD AT?
Originating ideas usually isn’t the hardest part of innovating.
Most companies
are sufficiently good at generating ideas, the “bottleneck” in the
innovation pro-
cess actually occurs a lot further down the pipeline.
1
Generating ideas inside
Generating ideas outside
Cross-pollinating ideas inside
Selecting promising ideas
Developing ideas into products/services
Diffusing proven ideas across the company
2 3
How good is your
company at the
following activities,
on a scale of
one to five?
How good is your
company at the

following activities,
on a scale of
one to five?
The sentiment was echoed by the head of inno-
vation at Mars Central Europe: “We try to recognize
people rather than offer material rewards. We hold
a corporate event, biannually, called Make The Dif-
ference, where ideas and success stor ies are
celebrated. The Central Europe team is very proud
of the fact that we won more awards at this event
last year than any other …
F A L L 2 0 1 6 I S S U E
Clayton M. Christensen
Thomas Bartman
Derek van Bever
The Hard Truth
About Business

Model Innovation
Many attempts at business model innovation fail. To change
that, executives need to understand how business models
develop through predictable stages over time — and then
apply that understanding to key decisions about new business
models.
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The Hard Truth
About Business
Model Innovation
E S S A Y : B U S I N E S S M O D E L S
PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK
THAT HAS BEEN INTENTIONALLY REMOVED.
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THE LEADING
QUESTION
How can
executives
improve their
odds of
success at
business
model
innovation?
FINDINGS
�Understand that,

over time, business
models become
more resistant to
change.
�Analyze how consis-
tent a proposed
business model
innovation is with
the priorities of the
existing business.
SURVEYING THE LANDSCAPE of recent attempts
at business model innovation, one could be forgiven for be-
lieving that success is essentially random. For example,
conventional wisdom would suggest that Google Inc., with its
Midas touch for innovation, might be more likely to succeed
in its business model innovation efforts than a traditional,
older, industrial company like the automaker Daimler AG.
But that’s not always the case. Google+, which Google
launched in 2011, has failed to gain traction as a social net-
work, while at this writing Daimler is building a promising
new venture, car2go, which has become one of the world’s
leading car-sharing businesses. Are those surprising out-
comes simply anomalies, or could they have been predicted?

To our eyes, the landscape of failed attempts at business
model innovation is crowded — and becoming more so — as
management teams at established companies mount both of-
fensive and defensive initiatives involving new business
models. A venture capitalist who advises large financial ser-
vices companies on strategy shared his observation about the
anxiety his investors feel about the changes underway in their
industry: “They look at the fintech [financial technology]
startups and see their business models being unbundled and
attacked at every point in the value chain.” And financial
services companies are not alone. A PwC survey published in
2015 revealed that 54% of CEOs worldwide were concerned
about new competitors entering their market, and an equal
percentage said they had either begun to compete in
FALL 2016 MIT SLOAN MANAGEMENT REVIEW 31
Many attempts at business model innovation fail. To change
that,
executives need to understand how business models develop
through predictable stages over time — and then apply that
understanding to key decisions about new business models.

BY CLAYTON M. CHRISTENSEN, THOMAS BARTMAN,
AND DEREK VAN BEVER
32 MIT SLOAN MANAGEMENT REVIEW FALL 2016
SLOANREVIEW.MIT.EDU
nontraditional markets themselves or considered
doing so.1 For its part, the Boston Consulting Group
reports that in a 2014 survey of 1,500 senior execu-
tives, 94% stated that their companies had attempted
some degree of business model innovation.2
We’ve decided to wade in at this juncture because
business model innovation is too important to be left
to random chance and guesswork. Executed correctly,
it has the ability to make companies resilient in the face
of change and to create growth unbounded by the lim-
its of existing businesses. Further, we have seen
businesses overcome other management problems
that resulted in high failure rates. For example, if you

bought a car in the United States in the 1970s, there
was a very real possibility that you would get a “lemon.”
Some cars were inexplicably afflicted by problem after
problem, to the point that it was accepted that such
lemons were a natural consequence of inherent ran-
domness in manufacturing. But management expert
W. Edwards Deming demonstrated that manufactur-
ing doesn’t have to be random, and, having
incorporated his insights in the 1980s, the major auto-
motive companies have made lemons a memory of a
bygone era. To our eyes, there are currently a lot of lem-
ons being produced by the business model innovation
process — but it doesn’t have to be that way.
In our experience, when the business world en-
counters an intractable management problem, it’s a
sign that business executives and scholars are get-
ting something wrong — that there isn’t yet a
satisfactory theory for what’s causing the problem,

and under what circumstances it can be overcome.
This is what has resulted in so much wasted time
and effort in attempts at corporate renewal. And
this confusion has spawned a welter of well-mean-
ing but ultimately misguided advice, ranging from
prescriptions to innovate only close to the core
business to assertions about the type of leader who
is able to pull off business model transformations,
or the capabilities a business requires to achieve
successful business model innovation.
The hard truth about business model innova-
tion is that it is not the attributes of the innovator
that principally drive success or failure, but rather
the nature of the innovation being attempted. Busi-
ness models develop through predictable stages
over time — and executives need to understand the
priorities associated with each business model
stage. Business leaders then need to evaluate

whether or not a business model innovation they
are considering is consistent with the current pri-
orities of their existing business model. This
analysis matters greatly, as it drives a whole host of
decisions about where the new initiative should be
housed, how its performance should be measured,
and how the resources and processes at work in the
company will either support it or extinguish it.
This truth has revealed itself to us gradually over
time, but our thinking has crystallized over the past
two years in an intensive study effort we have led at
the Harvard Business School. As part of that research
effort, we have analyzed 26 cases of both successful
and failed business model innovation; in addition,
we have selected a set of nine industry-leading com-
panies whose senior leaders are currently struggling
with the issue of conceiving and sustaining success
in business model innovation. (See “About the Re-

search.”) We have profiled these nine companies’
efforts extensively, documented their successes and
failures, and convened their executives on campus
periodically to enable them to share insights and
frustrations with each other. Stepping back, we’ve
made a number of observations that we hope will
prove generally helpful, and we also have a sense of
the work that remains to be done.
There are a number of lessons that managers can
learn from past successes and failures, but all depend
on understanding the rules that govern business
model formation and development — how new
models are created and how they evolve across time,
the kinds of changes that are possible to those mod-
els at various stages of development, and what that
means for organizational renewal and growth.
The Business Model’s Journey
The confusion surrounding business model innova-
tion begins, appropriately enough, with confusion

about the term “business model.” In our course at
the Harvard Business School, we teach students to
use a four-box business model framework that we
developed with colleagues from the consulting firm
Innosight LLC. This framework consists of the value
proposition for customers (which we will refer to as
the “job to be done”); the organization’s resources,
such as people, cash, and technology; the processes3
that it uses to convert inputs to finished products or
ABOUT THE
RESEARCH
This article assembles
knowledge that the primary
author has developed over
the course of two decades
studying what causes good
businesses to fail, comple-
mented by a two-year
intensive research project to
uncover where current man-
agers and leadership teams
stumble in executing busi-
ness model innovation. Over
the course of the past two
years of in-depth study, we
evaluated 26 business

model innovations in the his-
torical record that had run a
course from idea to develop-
ment to success, or failure.
The study identified 10 fail-
ures and 16 successes and
coded each across 20 di-
mensions to identify
patterns associated with
success and failure.
To further develop our
understanding of the causal-
ity behind the relationships
we observed, we also as-
sembled a cohort of nine
market-leading companies
from industries as diverse as
information technology, con-
sumer products, travel and
leisure, fashion, publishing,
and financial services. Each
of these companies is at-
tempting to execute some
degree of business model
innovation. We observed
these companies as they
undertook their business
model innovation efforts and
conducted interviews with
more than 60 C-level execu-
tives across the nine
companies. In addition to our
interviews, we convened
two working sessions at
Harvard Business School

that brought executives
from each company to-
gether to discuss the
challenges, opportunities,
and realities of business
model innovation from the
perspective of the manager.
SLOANREVIEW.MIT.EDU FALL 2016 MIT SLOAN
services; and the profit formula that dictates the mar-
gins, asset velocity, and scale required to achieve an
attractive return.4 (See “The Elements of a Business
Model.”) Collectively, the organization’s resources
and processes define its capabilities — how it does
things — while its customer value proposition and
profit formula characterize its priorities — what it
does, and why. 5
This way of viewing business models is useful for
two reasons. First, it supplies a common language
and framework to understand the capabilities of a
business. Second, it highlights the interdependencies

among elements and illuminates what a business is
incapable of doing. Interdependencies describe the
integration required between individual elements of
the business model — each component of the model
must be congruent with the others. They explain why,
for example, Rolls-Royce Motor Cars Ltd. is unable to
sell cheap bespoke cars and why Wal-Mart Stores Inc.
is unable to combine low prices with fancy stores.
Understanding the interdependencies in a business
model is important because those interdependencies
grow and harden across time, creating another funda-
mental truth that is critical for leaders to understand:
Business models by their very nature are designed not to
change, and they become less flexible and more resistant
to change as they develop over time. Leaders of the
world’s best businesses should take special note, be-
cause the better your business model performs at its
assigned task, the more interdependent and less capa-

ble of change it likely is. The strengthening of these
interdependencies is not an intentional act by manag-
ers; rather, it comes from the emergence of processes
that arise as the natural, collective response to recur-
rent activities. The longer a business unit exists, the
more often it will confront similar problems and the
more ingrained its approaches to solving those prob-
lems will become. We often refer to these ingrained
approaches as a business’s “culture.”6
In fact, this pattern is so consistent and important
that we’ve begun to think of the development of a
business model across time as resembling a journey
whose progress and route are predictable — although
the time that it takes a business model to follow this
journey will differ by industry and circumstance.
(See “The Three Stages of a Business Model’s Jour-
ney,” p. 34.) As the diagram depicts, a business model,
which in an established company is typically

embodied in a business unit,7 travels a one-way jour-
ney, beginning with the creation of the new business
unit and its business model, then shifting to sustain-
ing and growing the business unit, and ultimately
moving to wringing efficiency from it. Each stage of
the journey supports a specific type of innovation,
builds a particular set of interdependencies into the
model, and is responsive to a particular set of perfor-
mance metrics. This is the arc of the journey of
virtually every business model — if it is lucky and
successful enough to travel the entire length of the
route. Unsuccessful business units will falter before
concluding the journey and be absorbed or shut-
tered. Now, let’s explore each of the three stages and
how the business model evolves through them.
1. Creation Peter Drucker once said that the pur-
pose of a business is to create a customer.8 That
goal characterizes the first stage of the journey,

when the business searches for a meaningful value
proposition, which it can design initial product
and service offerings to fulfill. This is the stage
THE ELEMENTS OF A BUSINESS MODEL
A business model is made up of four elements: (1) a value
proposition for customers; (2) resources, such as people,
money, and technology; (3) the processes that the organiza-
tion uses to convert inputs to finished products or services;
and (4) the profit formula that dictates the margins, asset
velocity, and scale required to achieve an attractive return.
Interdependencies, represented here by bidirectional arrows,
describe the integration required between individual elements
of the business model. They require that every component of
the model be congruent with every other component.
A product that helps
customers to more
effectively, conveniently,
and affordably do a job
they've been trying to do
Assets and fixed cost
structure, and the margins
and velocity required to
cover them
People, technology,
products, facilities,
equipment, brands, and

cash that are required to
deliver this value
proposition to the
targeted customers
Ways of working together
to address recurrent tasks
in a consistent way:
training, development,
manufacturing, budgeting,
planning, etc.
Value proposition
Profit formula
Resources
Priorities Capabilities
Processes
SLOANREVIEW.MIT.EDU
at which a relatively small band of resources (a
founding team armed with an idea, some funding

and ambition, and sometimes a technology) is en-
tirely focused on developing a compelling value
proposition — fulfilling a significant unmet need,
or “job.”9 It’s useful to think of the members of the
founding team as completely immersed in this
search. The information swirling around them at
this point in the journey — the information they
pay the most attention to — consists of insights
they are able to glean into the unfulfilled jobs of
prospective customers.
We emphasize the primacy of the job at this
point of the journey because it is very difficult for a
business to remain focused on a customer’s job as
the operation scales. Understanding the progress a
customer is trying to make — and providing the
experiences in purchase and use that will fulfill that
job perfectly — requires patient, bottom-up in-
quiry. The language that is characteristic of this

stage is the language of questions, not of answers.
The link between value proposition and resources
is already forming, but the rest of the model is still
unformed: The new organization has yet to face the
types of recurrent tasks that create processes, and
its profit formula is nascent and exploratory. This
gives the business an incredible flexibility that will
disappear as it evolves along the journey and its
language shifts from questions to answers.
2. Sustaining Innovation Business units lucky
and skilled enough to discover an unfulfilled job
and develop a product or service that addresses it
enter the sustaining innovation phase of the busi-
ness model journey. At this stage, customer demand
reaches the point where the greatest challenge the
business faces is no longer determining whether the
product fulfills a job, but rather scaling operations
to meet growing demand. Whereas in the creation

phase the business unit created customers, in the
sustaining innovation phase it is building these
customers into a reliable, loyal base and building
the organization into a well-oiled machine that
delivers the product or service flawlessly and re-
peatedly. The innovations characteristic of this
phase of the business model journey are what we
call sustaining innovations — in other words, bet-
ter products that can be sold for higher prices to the
current target market.
A curious change sets in at this stage of the jour-
ney, however: As the business unit racks up sales, the
voice of the customer gets louder, drowning out to
some extent the voice of the job. Why does this hap-
pen? It’s not that managers intend to lose touch with
the job, but while the voice of the job is faint and re-
quires interrogation to hear, the voice of the
customer is transmitted into the business with each

sale and gets louder with every additional transac-
tion. The voice of the job emerges only in one-to-one,
in-depth conversations that reveal the job’s context
in a customer’s life, but listening to the voice of the
customer allows the business to scale its understand-
ing. Customers can be surveyed and polled to learn
their preferences, and those preferences are then
channeled into efforts to improve existing products.
The business unit is now no longer in the busi-
ness of identifying new unmet needs but rather in
the business of building processes — locking down
the current model. The data that surrounds manag-
ers is now about revenues, products, customers, and
competition. While in the creation phase, the found-
ing team had to dig to discover data, data now floods
THE THREE STAGES OF A BUSINESS MODEL’S JOURNEY
A business model, which in an established company is typically
embodied in a busi-
ness unit, travels a journey that begins with the creation of the
new business unit and
its business model, and then shifts to sustaining and growing the

business unit — and
still later to wringing efficiency from it. Each stage of the
journey is conducive to a
specific type of innovation, builds a particular set of
interdependencies into the model,
and is responsive to a particular set of performance metrics.
Green bidirectional arrows
represent interdependencies between aspects of the business
model that are well-
established at that stage; business model elements in bold
represent areas of focus
during that stage of business model evolution. Business model
elements and interde-
pendencies shown in beige are still somewhat flexible at that
point in the journey.
• Market-creating innovations
• Metrics about job to be done
• Data about context of the job
• Flexible business model
• Language of questions
about the job and context
• Sustaining innovations
• Income statement metrics
• Data about customers
• Processes emerge
• Language of statements
about products, customers,
competitors, and markets
• Efficiency innovations
• Balance sheet, ratio metrics
• Data about costs, efficiency

• Rigid business model to
facilitate modularity
• Language of statements
about cost and efficiency
Creation
Sustaining Innovation
Efficiency
Market
forms and
business
begins
to grow
Processes form
in response to
recurrent tasks
Performance
oversupply
may creep in
Modular
structure
forms
Investors
demand
return of
capital

Value
proposition Resources
Processes
Profit
formula
Value
Processes
Profit
formula
Value
Processes
Profit
formula
the business’s offices, with more arriving with each
new transaction. Data begs to be analyzed — it is the
way the game is scored — so the influx of data pre-
cipitates the adoption of metrics to evaluate the

business’s performance and direct future activity to
improving the metrics. The performance metrics in
this phase focus on the income statement, leading
managers to direct investments toward growing the
top line and maximizing the bottom line.
3. Efficiency At some point, however, these invest-
ments in product performance no longer generate
adequate additional profitability. At this point, the
business unit begins to prioritize the activities of effi-
ciency innovation, which reduce cost by eliminating
labor or by redesigning products to eliminate com-
ponents or replace them with cheaper alternatives.
(There is, however, always some amount of both
types of innovation — sustaining and efficiency —
occurring at any point of a business’s evolution.)
Broadly, the activities of efficiency innovation in-
clude outsourcing, adding financial leverage,
optimizing processes, and consolidating industries to

gain economies of scale. While many factors can
cause businesses to transition into the efficiency in-
novation phase of their evolution, one we have often
observed is the result of performance “overshoot,”
in which the business delivers more performance
than the market can utilize and consumers become
unwilling to pay for additional performance im-
provement or to upgrade to improved versions.
Managers should not bemoan the shift to efficiency
innovation. It needs to happen; over time, business
units must become more efficient to remain com-
petitive, and the shift to efficiency innovations as
the predominant form of innovation activity is a
natural outcome of that process.
To managers, the efficiency innovation phase
marks the point where the voice of the shareholders
drowns out the voice of the customer. Gleaning new
understanding of that initial job to be done is now

the long-lost ambition of a bygone era, and manag-
ers become inundated with data about costs and
efficiency. The business unit frequently achieves
efficiency by shifting to a modular structure, stan-
dardizing the interdependencies between each of the
components of its business model so that they may
be outsourced to third parties. In hardening these
interdependencies, the business unit reaps the
efficiency rewards of modularization but leaves flex-
ibility behind, firmly cementing the structure of its
business model in place. Deviations from the exist-
ing structure undermine the modularity of the
components and reduce efficiency, so when evaluat-
ing such changes, the business will often choose to
forsake them in pursuit of greater efficiency.
Now, when the business unit generates increasing
amounts of free cash flow from its efficiency innova-
tions, it is likely to sideline the capital, to diversify

the company, or to invest it in industry consolidation.
This is one of the major drivers of merger and ac-
quisition (M&A) activity. Whereas the sustaining
innovation phase was exciting to managers, customers,
and shareholders, the efficiency innovation phase re-
duces degrees of managerial freedom. Efficiency
innovations lure managers with their promises of low
risk, high returns, and quick paybacks from cost reduc-
tion, but the end result is often a race to the bottom that
sees the business’s ability to serve the job and customers
atrophy as it improves its service to shareholders.
The natural evolution of business units occurs all
around us. Consider the case of The Boeing Co. and
its wildly successful 737 business unit. The 737 busi-
ness was announced in 1965 and launched its first
version, the 737-100, in 1967, with Lufthansa as its
first customer. With orders from several additional
major airlines, the new business unit demonstrated

that its medium-haul plane fulfilled an important job
to be done. Before even delivering the first -100,
Boeing began improving the 737 and launched a
Managers should not bemoan the shift to efficiency innovation.
It needs to happen; over time, business units must become
more efficient to remain competitive.
SLOANREVIEW.MIT.EDU
stretched version, the -200, with a longer fuselage to
meet demands from airlines requiring greater seating
capacity. Boeing entered the sustaining innovation
phase and continued to improve its product by devel-
oping several generations of new 737s, stretching the
fuselage like an accordion while nearly doubling the
plane’s range and more than doubling its revenue per
available seat mile. The business continued to im-
prove how it served customers with the Next
Generation series in the 1990s, which offered even

bigger aircraft and better avionics systems.
Facing increased competition and demands for
improved financial performance, the 737 business
shifted its focus to efficiency innovation in the early
2000s. To free resources and liberate capital, Boeing
began to outsource aspects of 737 production. Most
notably, Boeing sold a facility in Wichita, Kansas, that
manufactured the main fuselage platform for the
737 to the Toronto-based investment company Onex
Corp. in 2005. Outsourcing subsystem production
allowed the business to improve its capital efficiency
and deliver improved returns on capital.10
Given that road map, what is the hope for com-
panies that seek to develop new business models or
to create new businesses? Thus far in this article
we’ve explored the journey that business units take
over time. And while we’re not sure that a business
unit can break off from this race, we know that its

parent companies can — by developing new busi-
nesses. Although the processes of an individual
business unit’s business model propel it along this
journey, the opportunity exists to develop a process
of business creation at the corporate level. But doing
so successfully requires paying careful attention to
the implications of the business model road map.
Implications For Business
Model Innovation
It’s worth internalizing the road map view of busi-
ness model evolution because it helps explain why
most attempts to alter the course of existing
business units fail. Unaware of the interdependen-
cies and rigidities that constrain business units to
pursuing their existing journey, managers attempt
to compel existing business units to pursue new
priorities or attempt to create a new business inside
an existing unit. Using the road map as a guiding
principle allows leaders to correctly categorize the

innovation opportunities that appear before them
in terms of their fit with their existing business
model’s priorities. Several recommendations for
managers emerge from this insight.
Determine how consistent the opportunity is
with the priorities of the existing business model.
The only types of innovation you can perform nat-
urally within an existing business model are those
that build on and improve the existing model and
accelerate its progress along the journey — in other
words, those innovations that are consistent with
its current priorities — by sharpening its focus on
fulfilling the existing job or improving its financial
performance. Therefore, a crucial question for
leaders to ask when evaluating an innovation op-
portunity is: To what degree does it align with the
existing priorities of the business model?
Many failed business model innovations involve

the pursuit of opportunities that appear to be con-
sistent with a unit’s current business model but that
in fact are likely to be rejected by the existing busi-
ness or its customers. (See “Evaluating the Fit
Between an Opportunity and an Existing Busi-
ness.”) To determine how consistent an opportunity
is with the priorities of the existing business model,
leaders should ask: Is the new job to be done for the
customer similar to the existing job? (The greater
the similarity, the more appropriate it is for the ex-
isting business to pursue the opportunity.) How
does pursuit of the opportunity affect the existing
profit formula? Are the margins better, transaction
sizes larger, and addressable markets bigger? If so, it
is likely to fit well with the existing profit formula.
If not, managers should tread with caution in
The only types of innovation you can perform naturally within
an existing business model are those that build on and improve
the existing model and accelerate its progress.

asking an existing business to take it on …
Business: Think different; Schumpeter
Anonymous . The Economist ; London Vol. 400, Iss. 8745,
(Aug 6, 2011): 60.
ProQuest document link
ABSTRACT
Innovation is today's equivalent of the Holy Grail. Rich-world
governments see it as a way of staving off stagnation.
Poor governments see it as a way of speeding up growth. And
businesspeople everywhere see it as the key to
survival. Which makes Clay Christensen the closest thing we
have to Sir Galahad. Fourteen years ago Mr
Christensen, a knight of the Harvard Business School,
revolutionised the study of the subject with The Innovator's
Dilemma, a book that popularised the term disruptive

innovation. This month he publishes a new study, The
Innovator's DNA, co-written with Jeff Dyer and Hal Gregersen,
which tries to take us inside the minds of successful
innovators. Mr Christensen and his colleagues list five habits of
mind that characterise disruptive innovators:
associating, questioning, observing, networking and
experimenting.
FULL TEXT
Economist.com/blogs/schumpeter
Clay Christensen lays down some rules for innovators. But can
innovation be learned?
INNOVATION is today's equivalent of the Holy Grail. Rich-
world governments see it as a way of staving off
stagnation. Poor governments see it as a way of speeding up
growth. And businesspeople everywhere see it as the
key to survival.
Which makes Clay Christensen the closest thing we have to Sir
Galahad. Fourteen years ago Mr Christensen, a
knight of the Harvard Business School, revolutionised the study
of the subject with "The Innovator's Dilemma", a

book that popularised the term "disruptive innovation". This
month he publishes a new study, "The Innovator's
DNA", co-written with Jeff Dyer and Hal Gregersen, which tries
to take us inside the minds of successful
innovators. How do they go about their business? How do they
differ from regular suits? And what can companies
learn from their mental habits?
Mr Christensen and his colleagues list five habits of mind that
characterise disruptive innovators: associating,
questioning, observing, networking and experimenting.
Innovators excel at connecting seemingly unconnected
things. Marc Benioff got the idea for Salesforce.com by looking
at enterprise software through the prism of online
businesses such as Amazon and eBay. Why were software
companies flogging cumbersome products in the form
of CD-ROMs rather than as flexible services over the internet?
Salesforce.com is now worth $19 billion.
These creative associations often come from broadening your
experience. Mr Benioff had his lucrative epiphany
while on sabbatical--swimming with dolphins, he says. Joe
Morton, co-founder of XANGO, got the idea for a new
health drink when he tasted mangosteen fruit in Malaysia. Mr
Christensen and co reckon that businesspeople are

35% more likely to sprout a new idea if they have lived in a
foreign country (a rather precise statistic). But this is
not a recipe for just hanging loose: IDEO, an innovation
consultancy, argues that the best innovators are "T-
shaped"--they need to have depth in one area as well as breadth
in lots.
http://library.capella.edu/login?qurl=https%3A%2F%2Fsearch.p
roquest.com%2Fdocview%2F881484308%3Faccountid%3D2796
5
roquest.com%2Fdocview%2F881484308%3Faccountid%3D2796
5
Innovators are constantly asking why things aren't done
differently. William Hunter, the founder of Angiotech
Pharmaceuticals, asked doctors why they didn't cover the stents
they use in heart operations with drugs to reduce
the amount of scar tissue (which accounts for 20% of
rejections). David Neeleman, the founder of JetBlue and
Azul, wondered why people treated airline tickets like cash,
freaking out when they lose them, whereas customers
could instead be given an electronic code?
This taste for questions is linked to a talent for observation.
Corey Wride came up with the idea for Movie Mouth, a
company that uses popular films to teach foreign languages,

when he was working in Brazil. He noticed that the
best English speakers had picked it up from film stars, not
school teachers. But people without a flair for
languages find the "Brad Pitt" method tricky--actors speak too
fast. So Mr Wride invented a computer program that
allows users to slow films down, hear explanations of various
idioms and even speak the actors' lines for them.
For all their reputation as misfits, innovators tend to be great
networkers. But they hang around gabfests to pick up
ideas, not to win contracts. Michael Lazaridis, the founder of
Research in Motion, says he had the idea for the
BlackBerry at a trade show, when someone told him how Coca-
Cola machines used wireless technology to signal
that they needed refilling. Kent Bowen has turned CPS
Technologies into one of the world's fizziest ceramics
companies by encouraging his employees to network with
scientists who are confronted with similar problems in
different fields: for example, the company eliminated
troublesome ice crystals by talking to experts on freezing
sperm (really).
Innovators are also inveterate experimenters, who fiddle with
both their products and their business models. Jeff
Bezos, the founder of Amazon, now sells e-readers and rents out

computer power and data storage (by one
estimate a quarter of small and medium-sized companies in
Silicon Valley use the company's cloud). These
experiments are frequently serendipitous. IKEA never planned
to base its business on self-assembly. But then a
marketing manager discovered that the best way to get some
furniture back into a lorry, after a photo-shoot, was
to take its legs off, and a new business model was born. Listen
to mommy
Messrs Christensen, Dyer and Gregersen argue that companies
that have the highest "innovation premiums"
(calculated by looking at the proportion of their market value
that cannot be accounted for by their current
products) display the same five habits of mind as individual
innovators. They work hard to recruit creative people.
(Mr Bezos asks job applicants to tell him about something they
have invented.) They work equally hard at
stimulating observation and questioning. Keyence Corporation,
a Japanese maker of automation devices for
factories, requires its salespeople to spend hours watching its
customers' production lines. Procter &Gamble and
Google have found that job swaps provoke useful questions: the
Googlers were stunned that P&G did not invite

"mommy bloggers"--women who write popular blogs on child-
rearing--to attend its press conferences.
For all their insistence that innovation can be learned, Mr
Christensen and co produce a lot of evidence that the
disruptive sort requires genius. Nearly all the world's most
innovative companies are run by megaminds who set
themselves hubristic goals such as "putting a ding in the
universe" (Steve Jobs). During Mr Jobs's first tenure at
Apple, the company's innovation premium was 37%. In 1985-
98, when Mr Jobs was elsewhere, the premium fell to
minus 30%. Now that Mr Jobs is back, the premium has risen to
52%. The innovator's DNA is rare, alas. And unlike
Mr Jobs's products, it is impossible to clone.
DETAILS
Subject: International; Nonfiction; Innovations; Management
science; Books
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science/operations research; 5400:
Research &development
Publication title: The Economist; London
Volume: 400
Issue: 8745
Pages: 60
Publication year: 2011
Publication date: Aug 6, 2011
Section: Business
Publisher: The Economist Intelligence Unit N.A., Incorporated
Place of publication: London
Country of publication: United Kingdom, London
Publication subject: Business And Economics--Economic
Systems And Theories, Economic History,
Business And Economics--Economic Situation And Conditions
ISSN: 00130613
CODEN: ECSTA3
Source type: Magazines
Language of publication: English

Document type: Commentary
ProQuest document ID: 881484308
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different; Schumpeter
ARTWORK Josef Schulz, Form #1, 2001
C-print, 120 x 160 cm
How P&G
Tripled Its
Innovation
Success Rate
Inside the company’s new-growth factory
by Bruce Brown and Scott D. Anthony
Spotlight
64 Harvard Business Review June 2011
SPOTLIGHT ON PRODUCT INNOVATION
1157 Jun11 Brown.indd 641157 Jun11 Brown.indd 64 4/27/11
4:39:24 PM4/27/11 4:39:24 PM
Scott D. Anthony is the
managing director of
Innosight.
Bruce Brown is the chief
technology offi cer of Procter
& Gamble.
June 2011 Harvard Business Review 65
HBR.ORG

4:39:33 PM4/27/11 4:39:33 PM
BBACK IN 2000 the prospects for Procter & Gamble’s Tide, the
biggest brand in the company’s fabric and household care
division, seemed limited. The laundry detergent had been
around for more than 50 years and still dominated its core
markets, but it was no longer growing fast enough to support
P&G’s needs. A decade later Tide’s revenues have nearly
doubled, helping push annual division revenues from $12 billion
to almost $24 billion. The brand is surging in emerging markets,
and its iconic bull’s-eye logo is turning up on an array of new
products and even new businesses, from instant clothes fresh-
eners to neighborhood dry cleaners. This isn’t accidental. It’s
the result of a strategic eff ort by P&G over the past decade to
systematize in-novation and growth.
To understand P&G’s strategy, we need to go back
more than a century to the sources of its inspiration—
Thomas Edison and Henry Ford. In the 1870s Edison
created the world’s fi rst industrial research lab, Menlo
Park, which gave rise to the technologies behind the
modern electric-power and motion-picture indus-
tries. Under his inspired direction, the lab churned
out ideas; Edison himself ultimately held more than
1,000 patents. Edison of course understood the im-
portance of mass production, but it was his friend
Henry Ford who, decades later, perfected it. In 1910
the Ford Motor Company shifted the production of
its famous Model T from the Piquette Avenue Plant,
in Detroit, to its new Highland Park complex nearby.
Although the assembly line wasn’t a novel concept,
Highland Park showed what it was capable of: In four

years Ford slashed the time required to build a car
from more than 12 hours to just 93 minutes.
How could P&G marry the creativity of Edison’s
lab with the speed and reliability of Ford’s factory?
The answer its leaders devised, a “new-growth fac-
tory,” is still ramping up. But already it has helped
the company strengthen both its core businesses
and its ability to capture innovative new-growth
opportunities.
P&G’s eff orts to systematize the serendipity that
so often sparks new-business creation carry impor-
tant lessons for leaders faced with shrinking product
life cycles and increasing global competition.
Laying the Foundation
Innovation has long been the backbone of P&G’s
growth. As chairman, president, and CEO Bob Mc-
Donald notes, “We know from our history that while
promotions may win quarters, innovation wins
decades.” The company spends nearly $2 billion
annually on R&D—roughly 50% more than its clos-
est competitor, and more than most other competi-
tors combined. Each year it invests at least another
$400 million in foundational consumer research to
discover opportunities for innovation, conducting
some 20,000 studies involving more than 5 million
consumers in nearly 100 countries. Odds are that as
you’re reading this, P&G researchers are in a store
somewhere observing shoppers, or even in a con-
sumer’s home.
These investments are necessary but not suf-
fi cient to achieve P&G’s innovation goals. “People
will innovate for financial gain or for competitive

advantage, but this can be self-limiting,” McDonald
says. “There needs to be an emotional component as
well—a source of inspiration that motivates people.”
At P&G that inspiration lies in a sense of purpose
driven from the top down—the message that each
innovation improves people’s lives.
At the start of the 2000s only about 15% of P&G’s
innovations were meeting revenue and profit tar-
gets. So the company launched its now well-known
Connect + Develop program to bring in outside
innovations and built a robust stage-gate process
to help manage ideas from inception to launch.
(For more on C+D, see Larry Huston and Nabil
Sakkab, “Connect and Develop: Inside Procter &
Gamble’s New Model for Innovation,” HBR March
2006.) These actions showed early signs of rais-
ing innovation success rates, but it was clear that
P&G needed more breakthrough innovations.
And it had to come up with them as reliably
as Ford’s factory had rolled out Model Ts.
4:39:43 PM4/27/11 4:39:43 PM
without a further boost to its organic growth capa-
bilities, the company would still have trouble hitting
its targets.

P&G’s leaders recognized that the kind of growth
the company was after couldn’t come from simply
doing more of the same. It needed to come up with
more breakthrough innovations—ones that could
create completely new markets. And it needed to do
this as reliably as Henry Ford’s Highland Park factory
had rolled out Model Ts.
In 2004 Gil Cloyd, then the chief technology of-
ficer, and A.G. Lafley, then the CEO, tasked two
30-year P&G veterans, John Leikhim and David Gou-
lait, with designing a new-growth factory whose
intellectual underpinnings would derive from the
Harvard Business School professor Clayton Chris-
tensen’s disruptive-innovation theory. The basic
concept of disruption—driving growth through new
off erings that are simpler, more convenient, easier
to access, or more affordable—was hardly foreign
to P&G. Many of the company’s powerhouse brands,
including Tide, Crest, Pampers, and Swiff er, had fol-
lowed disruptive paths.
Leikhim and Goulait, with support from other
managers, began by holding a two-day workshop for
seven new-product-development teams, guided by
facilitators from Innosight (a firm Christensen co-
founded). The attendees explored how to shake up
embedded ways of thinking that can inhibit disrup-
tive approaches. They formulated creative ways to
address critical commercial questions—for example,
whether demand would be sufficient to warrant a
new-product launch. Learning from the workshop
helped spur the development of new products, such
as the probiotic supplement Align, and also bolstered
existing ones, such as Pampers.

In the years that followed, Leikhim and Goulait
shored up the factory’s foundation, working with
Cloyd and other P&G leaders to:
Teach senior management and project team
members the mind-sets and behaviors that foster
disruptive growth. The training, which has changed
over time, initially ranged from short modules on top-
ics such as assessing the demand for an early-stage
idea to multiday courses in entrepreneurial thinking.
Form a group of new-growth-business
guides to help teams working on disruptive proj-
ects. These experts might, for instance, advise teams
to remain small until their project’s key commercial
questions, such as whether consumers would ha-
bitually use the new product, have been answered.
The guides include several entrepreneurs who have
succeeded—and, even more important, failed—in
starting businesses.
Develop organizational structures to drive
new growth. For example, in a handful of business
units the company created small groups focused
primarily on new-growth initiatives. The groups
(which, like the training, have evolved signifi cantly)
augmented an existing entity, FutureWorks, whose
charter is to create new brands and business mod-
els. Dedicated teams within the groups conducted
market research, developed technology, created
business plans, and tested assumptions for specifi c
projects.
Produce a process manual—a step-by-step
guide to creating new-growth businesses. The
manual includes overarching principles as well as

detailed procedures and templates to help teams
describe opportunities, identify requirements for
success, monitor progress, make go/no-go decisions,
and more.
Run demonstration projects to showcase the
emerging factory’s work. One of these was a line of
pocket-size products called Swash, which quickly
refresh clothes: For example, someone who’s in a
hurry can give a not-quite-clean shirt a spray rather
than putting it through the wash.
Idea in Brief
Procter & Gamble is a
famous innovator. Nonethe-
less, in the early 2000s only
15% of its innovations were
meeting their revenue and
profi t targets. To address this,
the company set about build-
ing organizational structures
to systematize innovation.
The resulting new-growth
factory includes large new-
business creation groups,
focused project teams, and
entrepreneurial guides who
help teams rapidly proto-
type and test new products
and business models in the
market. The teams follow
a step-by-step business
development manual and
use specialized project and

portfolio management tools.
Innovation and strategy
assessments, once sepa-
rate, are now combined in
revamped executive reviews.
P&G’s experience sug-
gests six lessons for leaders
looking to build new-growth
factories: Coordinate the
factory with the company’s
core businesses, be a vigilant
portfolio manager, start
small and grow carefully,
create tools for gauging
new businesses, make sure
the right people are doing
the right work, and nurture
cross-pollination.
About the
Spotlight Artist
Each month we illustrate
our Spotlight package with
a series of works from an ac-
complished artist. We hope
that the lively and cerebral
creations of these photogra-
phers, painters, and instal-
lation artists will infuse our
pages with additional energy
and intelligence and amplify
what are often complex and
abstract concepts.

This month’s artist is
Josef Schulz, a German
photographer who often
turns his lens on modern
industrial constructs and
digitally strips away defi ning
details to render more-
abstract, universally rel-
evant images. “In the fi rst
step I’m a photographer
with his limitations,” he
once told an interviewer,
“and then an artist with his
freedom of decisions.”
View more of the artist’s
work at josefschulz.de.
HOW P&G TRIPLED ITS INNOVATION SUCCESS RATE
HBR.ORG
4:39:50 PM4/27/11 4:39:50 PM
Sharpening the Focus
By 2008 P&G had a working prototype of the factory,
but the company’s innovation portfolio was weighed
down by a proliferation of small projects. A.G. Laf-
ley charged Bob McDonald (then the COO) and CTO
Bruce Brown (a coauthor of this article) to dramati-
cally increase innovation output by focusing the fac-

tory on fewer but bigger initiatives. McDonald and
Brown’s team drove three critical improvements.
First, rather than strictly separating innovations
designed to bolster existing product lines from ef-
forts to create new product lines or business mod-
els, P&G increased its emphasis on an intermediate
category: transformational-sustaining innovations,
which deliver major new benefi ts in existing prod-
uct categories.
Consider the Crest brand, the market leader un-
til the late 1990s, when it was usurped by Colgate.
Looking for a comeback, in 2000 P&G launched a
disruptive innovation, Crest Whitestrips, that made
teeth whitening at home affordable and easy. In
2006 it introduced Crest Pro-Health, which squeezes
half a dozen benefi ts into one tube—the toothpaste
fi ghts cavities, plaque, tartar, stains, gingivitis, and
bad breath. In 2010 it rolled out Crest 3D White, a
line of advanced oral care products, including one
that whitens teeth in two hours. Such eff orts helped
Crest retake the lead in many markets. Pro-Health
and 3D White were both transformational-sustaining
innovations, meant to appeal to current consumers
while attracting new ones. These sorts of innova-
tions share an important trait with market-creating
disruptive innovations: They have a high degree of
uncertainty—something the factory is specifi cally
designed to manage.
Second, P&G strengthened organizational
supports for the formation of transformational-
sustaining and disruptive businesses. It established
several new-business-creation groups, larger in size

and scope than any previous growth-factory team,
whose resources and management are kept carefully
separate from the core business. These groups—
dedicated teams led by a general manager—develop
ideas that cut across multiple businesses, and also
pursue entirely new business opportunities. One
group covers all of P&G’s beauty and personal care
businesses; another covers its household care busi-
ness (the parent unit of the fabric-and-household
and the family-and-baby-care divisions); a third,
FutureWorks, focuses largely on enabling differ-
ent business models (it helped guide P&G’s recent
partnership with the Indian business Healthpoint
Services). The new groups supplement (rather than
replace) existing supports such as the Corporate In-
novation Fund, which provides seed capital to ideas
that might otherwise slip through the cracks. P&G
also created a specialized team called Learning-
Works, which helps plan and execute in-market
experiments to learn about purchase decisions and
postpurchase use.
Third, P&G revamped its strategy development
and review process. Innovation and strategy as-
sessments had historically been handled separately.
Now the CEO, CTO, and CFO explicitly link company,
business, and innovation strategies. This integra-
tion, coupled with new analyses of such issues as
competitive factors that could threaten a given busi-
ness, has surfaced more opportunities for innova-
tion. The process has also prompted examinations
of each unit’s “production schedule,” or pipeline
of growth opportunities, to ensure that it’s robust
enough to deliver against growth goals for the next
seven to 10 years. Evaluations are made of individual
business units (feminine care, for example) as well

as broad sectors (household care). This revised ap-
proach calls for each business unit to determine
the mix of innovation types it needs to deliver the
required growth.
P&G’s Four
Types of
Innovation
Sustaining innovations bring incre-
mental improvements to existing
products: a little more cleaning
power to a laundry detergent, a better
fl avor to a toothpaste. These provide
what P&G calls “er” benefi ts—better,
easier, cheaper—that are important
to sustaining share among current
customers and getting new people
to try a product.
Commercial innovations use creative
marketing, packaging, and promo-
tional approaches to grow existing
off erings. During the 2010 Winter
Olympics, P&G ran a series of ads
celebrating mothers. The campaign
covered 18 brands, was viewed re-
peatedly by hundreds of millions
of consumers, and drove $100 million
in revenues.
CommercialSustaining

4:39:55 PM4/27/11 4:39:55 PM
Running the Factory
Let’s return now to Tide, whose dramatic growth
highlights the potential of P&G’s approach. Over the
past decade the brand has launched numerous prod-
ucts and product-line extensions, carved new paths
in emerging markets, and tested a promising new
business model.
If you had looked for Tide in a U.S. supermarket
10 years ago, you would have found, for the most
part, ordinary bottles and boxes of detergent. Now
you’ll see the Tide name on dozens of products, all
with diff erent scents and capabilities. For example,
in 2009 P&G introduced a line of laundry additives
called Tide Stain Release. Within a year, building
on 26 patents, it incorporated these additives into a
new detergent, Tide with Acti-Lift—the fi rst major
redesign of Tide’s liquid laundry detergent in a de-
cade. The product’s launch drove immediate market-
share growth of the Tide brand in the United States.
P&G has also customized formulations for emerg-
ing markets. Ethnographic research showed that
about 80% of consumers in India wash their clothes
by hand. They had to choose between detergents that
were relatively gentle on the skin but not very good
at actually cleaning clothes, and more-potent but
harsher agents. With the problem clearly identifi ed,
in 2009 a team came up with Tide Naturals, which

cleaned well without causing irritation. Mindful of
the need in emerging markets to provide greater
benefi t at lower cost—“more for less”—P&G priced
Tide Naturals 30% below comparably eff ective but
harsher products. This made the Tide brand acces-
sible to 70% of Indian consumers and has helped to
signifi cantly increase Tide’s share in India.
More radically, Swash moved the Tide brand out
of the laundry room. The line has clear disruptive
characteristics: Swash products don’t clean as thor-
oughly as laundry detergents or remove wrinkles
as eff ectively as professional pressing. But because
they’re quick and easy to use, they offer “good
enough” occasional alternatives between washes.
Swash took an unconventional path to commercial-
ization. When the products were fi rst sold, in a store
near P&G’s headquarters in Ohio, they carried a dif-
ferent brand name and had no apparent connection
to Tide. After that experiment, P&G opened a “pop
up” Swash store at The Ohio State University. Both
tests helped the company understand how consum-
ers would buy and use the products, which P&G then
began selling exclusively through Amazon and other
online channels. In early 2011 the company ramped
down its promotion of Swash, although learning
from the eff ort will inform its work on other disrup-
tive ideas in the clothes-refreshing space.
Whereas Swash was a new product line, Tide Dry
Cleaners represents an entirely new business model.
It started when a team began exploring ways to
disrupt the dry-cleaning market, using proprietary
technologies and a unique store design grounded in

insights about consumers’ frustrations with existing
options. Many cleaning establishments are dingy,
unfriendly places. Customers have to park, walk,
and wait. Often the cleaners’ hours are inconvenient.
P&G’s alternative: bright, boldly colored cleaners
Transformational-sustaining innova-
tions reframe existing categories.
They typically bring order-of-magnitude
improvements and fundamental
changes to a business and often lead
to breakthroughs in market share,
profi t levels, and consumer accep-
tance. In 2009 P&G introduced the
wrinkle-reducing cream Olay Pro-X.
Launching a $40-a-bottle product in
the depths of a recession might seem
a questionable strategy. But P&G
went ahead because it considered the
product a transformational-sustaining
innovation—clinically proven to be as
eff ective as its much more expensive
prescription counterparts, and supe-
rior to the company’s other antiaging
off erings. The cream and related
products generated fi rst-year sales
of $50 million in U.S. food retailers
and drugstores alone.
Disruptive innovations represent new-
to-the-world business opportunities.
A company enters entirely new busi-
nesses with radically new off erings,
as P&G did with Swiff er and Febreze.

Transformational-Sustaining Disruptive
Tide Dry Cleaners is a factory innovation that
represents an entirely new business model.
HOW P&G TRIPLED ITS INNOVATION SUCCESS RATE
HBR.ORG
4:40:00 PM4/27/11 4:40:00 PM
featuring specialized treatments, drive-through
windows, and 24-hour storage lockers to facilitate
after-hours drop-off and pickup.
Using the new-growth factory’s process manual,
the development team identifi ed key assumptions
about the proposed dry cleaners. For example, could
the business model generate enough returns to at-
tract store owners willing to pay up to $1 million for
franchise rights? In 2009 P&G’s guides helped the
team open three pilots in Kansas City to try to fi nd
out. That year P&G also formed Agile Pursuits Fran-
chising, a subsidiary to oversee such efforts, and
transferred ownership of the dry-cleaning venture to
FutureWorks, whose main mission is to pursue new
business models that lie outside P&G’s established
systems. It remains to be seen how Tide Dry Cleaners
will fare, but one promising sign came in 2010, when
Andrew Cherng, the founder of the Panda Restau-
rant Group, announced plans to open 150 franchises
in four years. He told BusinessWeek, “I wasn’t around

when McDonald’s was taking franchisees, [but] I’m
not going to miss this one.”
To ensure strategic cohesion and smart re-
source allocation, Tide’s innovation efforts have
been closely coordinated through regular dialogues
among several leaders—CEO McDonald, CTO Brown,
the vice-chair of the household business unit, and
the president of the fabric care division. They’ve also
been the focus of discussions at Corporate Innova-
tion Fund meetings and similar reviews.
This isn’t just the methodical pursuit of a single
innovation. It’s part of a steady stream of ideas in
development—a factory humming with work.
Lessons for Leaders
Efforts to build a new-growth factory in any com-
pany will fail unless senior managers create the
right organizational structures, provide the proper
resources, allow suffi cient time for experimentation
and learning, and personally engage. Our journey at
P&G suggests six lessons for leaders looking to create
new-growth factories.
1. Closely coordinate the factory and the
core business. Leaders sometimes see eff orts to
foster new growth as completely distinct from ef-
forts to bolster the core; indeed, many in the innova-
tion community have argued as much for years. Our
experience indicates the opposite. First, new-growth
eff orts depend on a healthy core business. A healthy
core produces a cash flow that can be invested in
new growth. And we’ve all known times when an
ailing core has demanded management’s full at-

tention; a healthy core frees leaders to think about
more-expansive growth initiatives.
Second, a core business is rich with capabilities
that can support new-growth eff orts. Consider P&G’s
excellent relationships with major retailers. Those
relationships are a powerful, hard-to-replicate asset
that helps the factory expedite new-growth initia-
tives. Swiff er wouldn’t be Swiff er without them.
Third, some of the tools for managing core
efforts—particularly those that track a project’s
progress—are also useful for managing new-growth
eff orts. And fi nally, the factory’s rapid-learning ap-
proach often yields insights that can strengthen ex-
isting product lines. One of the project teams at the
2004 workshop was seeking to spur conversion in
emerging markets from cloth to disposable diapers.
Subsequent in-market tests yielded a critical discov-
ery: Babies who wore disposable diapers fell asleep
30% faster and slept 30 minutes longer than babies
wearing cloth diapers—an obvious benefi t for infants
(and their parents). Advertising campaigns touting
this advantage helped make Pampers the number
one brand in several emerging markets.
2. Promote a portfolio mind-set. P&G com-
municates to both internal and external stakehold-
ers that it is building a varied portfolio of innovation
The Factory’s Consumer Research at Work
In October 2010 P&G launched
the Gillette Guard razor in India,
a transformational-sustaining innova-
tion whose strategic intent was simple:
to provide a cheaper and eff ective al-

ternative for the hundreds of millions of
Indians who use double-edged razors.
The company’s researchers spent
thousands of hours in the market to
understand these consumers’ needs.
They gained important insights by
observing men in rural areas who,
lacking indoor plumbing, typically
shave outdoors using little or no wa-
ter—and don’t shave every day. The
single-blade Gillette Guard was thus
designed to clean easily, with minimal
water, and to manage longer stubble.
The initial retail price was 15 rupees
(33 cents), with refi ll cartridges for
fi ve rupees (11 cents). Early tests
showed that consumers preferred the
new product to double-edged razors
by a six-to-one margin. Its break-
through performance and aff ordabil-
ity position it for rapid growth.
4:40:05 PM4/27/11 4:40:05 PM
approaches, ranging from sustaining to disruptive
ones. (See the sidebar “P&G’s Four Types of Inno-
vation.”) It uses a set of master-planning tools to

match the pace of innovation to the overall needs of
the business. It also deploys portfolio-optimization
tools that help managers identify and kill the
least-promising programs and nurture the best
bets. These tools create projections for every active
idea, including estimates of the fi nancial potential
and the human and capital investments that will
be required. Some ideas are evaluated with clas-
sic net-present-value calculations, others with a
risk-adjusted real-option approach, and still others
with more-qualitative criteria. Although the tools
assemble a rank-ordered list of projects, P&G’s port-
folio management isn’t, at its core, a mechanical ex-
ercise; it’s a dialogue about resource allocation and
business-growth building blocks. Numerical input
informs but doesn’t dictate decisions.
A portfolio approach has several benefi ts. First, it
sets up the expectation that diff erent projects will
be managed, resourced, and measured in diff erent
ways, just as an investor would use diff erent criteria
to evaluate an equity investment and a real estate
one. Second, because the portfolio consists largely of
sustaining and transformational-sustaining eff orts,
seeing it as a whole highlights the critical impor-
tance of these activities, which protect and extend
core businesses. Finally, a portfolio approach helps
reinforce the message that any project, particularly a
disruptive one, may carry substantial risk and might
not deliver commercial results—and that’s fi ne, as
long as the portfolio accounts for the risk.
3. Start small and grow carefully. Remember
how the new-growth factory began: with a simple
two-day workshop. It then expanded to small-scale

pilots in several business units before becoming a
companywide initiative.
Staged investment allows for early, rapid revi-
sion—before lines scribbled on a hypothetical organi-
zational chart are engraved in stone. It also provides
for targeted experimentation. For example, there is
legitimate disagreement about the best way to orga-
nize for new growth. Whereas we believe in a factory
with relatively strong ties to the core, some advocate
a “skunkworks” organization. Others argue for “dis-
tinct but linked” organizations under an “ambidex-
trous” leader; still others recommend mirroring the
structure of a venture capital firm. (P&G’s factory
uses several organizational approaches.) Treating
capability development itself as a new-growth inno-
vation lets companies try diff erent approaches and
learn what works best for them.
A staged approach serves another important
purpose: It’s a built-in reminder that a new-growth
factory is not a quick fi x. The factory won’t provide
a sudden boost to next quarter’s results, nor can it in-
stantly rein in an out-of-control core business that’s
veering from crisis to crisis.
4. Create new tools for gauging new busi-
nesses. Anticipated and nascent markets are noto-
riously hard to analyze. Detailed follow-up with one
of the project teams that attended the pilot work-
shop showed P&G that it needed new tools for this
purpose. P&G now conducts “transaction learning
experiments,” or TLEs, in which a team “makes a
little and sells a little,” thus letting consumers vote
with their wallets. Teams have sold small amounts of

products online, at mall kiosks, in pop-up stores, and
at amusement parks—even in the company store
and outside company cafeterias. P&G devised a ven-
ture capital approach to testing the market …
The new and The old: conTainer homes in china
“The concepts,
constructs and
mindset that have
prevailed over the
past century need
to be transformed
as a new future, with
India and China as
dominant powers,
comes into play.”
Nirmalya Kumar
BUSINESS STRATEGY REVIEW Q2 – 201006
BUSINESS
GlaxoSmithKline faced a
situation common to large
global organisations: how to
allocate marketing resources to
smaller, regional brands. Julian
Birkinshaw and Peter Robbins
report on the company’s inventive
approach to worldwide marketing

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